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TMI Blog2019 (4) TMI 702X X X X Extracts X X X X X X X X Extracts X X X X ..... production of these additional evidences before the AO during the course of assessment proceedings nor learned CIT(A) considered appropriate to record reasons and justification for admitting these additional evidences as is required under sub-rule 1 of Rule 46A. It is not the case of the assessee that learned CIT(A) directed assessee to produce these additional evidences as is contemplated vide sub-rule 4 of Rule 46A. Neither it is a case of the assessee where learned CIT(A) has suo moto directed inquiry as is contemplated u/s 250(4). The instant case before us is not covered by these exceptions. There is no dispute as to proposition canvassed by the assessee that powers of learned CIT(A) are co-terminus with the powers of the AO but Rule 46A cannot be simply given go bye other wise it will become otiose . This is never the intention of law makers. We are afraid that decision of Hon ble Supreme Court in the case of Kanpur Coal Syndicate [1964 (4) TMI 18 - SUPREME COURT] cannot come to rescue of the assessee as there is no dispute to the proposition that learned CIT(A) powers are co-terminus with powers of the AO but Rule 46A of the 1962 cannot be given a simple go bye. We are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eals)-8, Mumbai (hereinafter called the CIT(A) ), for assessment year(AY) 2012-13, the appellate proceedings had arisen before learned CIT(A) from the assessment order dated 31.03.2015 passed by learned Assessing Officer (hereinafter called the AO ) u/s 143(3) of the Income-tax Act, 1961 (hereinafter called the Act ) for AY 2012-13. 2. The grounds of appeal raised by Revenue in the memo of appeal filed with the Income-Tax Appellate Tribunal, Mumbai (hereinafter called the tribunal ) read as under:- 1. Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) was right in deleting the addition on account of extensive repairs and renovation of the leased premises without appreciating the fact that these expenses were capital in nature and that the Explanation to section 30 also provides for treatment of expenses as Capital Expenditure for rented premises. 2. Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in not appreciating the fact that the expenses on repairs and renovation, as per para 1 above, were of enduring nature and were not in the form of current repairs 3. Whether on the facts and cir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pinion of the AO was of capital in nature and the aforesaid repairs and renovation/improvement by way of repairs were for enduring benefits. The assessee was asked by the AO to explain as to why the aforesaid Repairs and Maintenance expenses claimed as Revenue Expenditure be not disallowed as these expenses are capital in nature and therefore depreciation on applicable rates be allowed on the said capital expenditure. The assessee in reply explained before the AO that it has taken over additional bakery to increase production for new outlets and hence Renovation of the bakery was done which expenditure is Revenue in nature. It was further submitted by the assessee that Plant and Machinery which was acquired for being installed at Jalal Bakery at Bandra was already capitalised by the assessee and depreciation was claimed on the same at an appropriate rates . It was submitted by the assessee before the AO that all the premises were taken on lease hold basis for a period from 3 years to 5 years and in all there are presently seven outlets. 3.3 The AO rejected the contentions of the assessee and held that an expenditure is capital in nature incurred by the assessee for enduring bene ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ccount of treating certain expenses incurred by the Appellant towards repairs / renovation / machinery as capital expenses in nature contrary to the claim of the Appellant that they were revenue expenses in nature. 5. The present appeal is filed against this order dated 31.03.2015 for AY 2012-13 passed by the Ld. AO. A separate document containing the Statement of Facts and Grounds of Appeal in the present matter has already been filed by the Appellant, but for Your Honour's convenience, the questions involved in the present appeal are summarised herein below: I. The Ld. AO erred in not granting proper and sufficient opportunity of being heard to the Appellant while framing the assessment; II. Without prejudice to the aforesaid, the Ld. AO erred in making addition of ₹ 82,90,912/- to the income of the Appellant as alleged Capital Expenditure; III. While doing so, the Ld. AO erred in basing his action solely on surmises, suspicion, conjecture, extraneous and irrelevant considerations, and in ignoring relevant material and consideration as submitted by the Appellant. 6. In support of the issues raised, the Appellant would like to make the following ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee to the Licensor was adjusted to that extent. d) These expenses which were incurred by the Appellant for the AY in consideration at its Jalal Bakery and Bandra outlet together amounting to ₹ 92,66,827/- were incurred solely for renovation, repairs and maintenance of the leasehold premises and no new asset of an enduring benefit was created out of the same. These expenses were incurred on account of facilitating the trading activities of the Appellant and for making the premises hygienic, clean, safe and structurally sound and as such, did not require capitalization and were rightly accounted for as revenue expenses in the Appellant's books of accounts. In light of the aforesaid, it is humbly submitted that these expenses are allowable under the provisions of S. 30(a)(i) of the Income Tax Act, 1961 which provides that when an assessee occupies premises from where business is carried out as a tenant, the amount paid on account of repairs undertaken by the assessee is allowable as revenue expenditure. In any event, and without prejudice to the aforesaid, it is submitted that since these expenses were incurred wholly and exclusively by the Assessee for the purpose ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inders, various ovens, refrigerators, chillers, water purifiers, etc. These assets have been duly accounted for separately by the Appellant as fixed assets in its books of accounts, and a detailed schedule specifically listing out these capital assets together amounting to ₹ 1,32,99,827/- (Rupees one crore thirty two lakhs ninety nine thousand eight hundred twenty seven) which came into existence for the AY under consideration is annexed hereto as Annexure E. Thus, where capital assets were introduced into the business of the Assessee, the Assessee duly accounted for the same in its books of accounts and has claimed depreciation thereon, and where expenses for repairs and renovation were incurred in respect of tenanted premises, the Assessee, the same have been rightly treated as revenue expenses in its books of account. h) It is submitted that the AO has blindly relied on the test of enduring effect on the business premise; failing to appreciate that on the facts of the present case, there is no new capital asset acquired by the Appellant and there is no enduring benefit in the capital field. The test of enduring benefit is not a conclusive test for determining any di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Apex Court observed that an expenditure incurred on renovation of a leasehold building has to be treated as revenue in nature. The Apex Court further also noticed that right from the inception, when the ownership of the building is with the lessor and the assessee cannot be said to have acquired any capital asset. The only benefit, which the assessee would derive by spending the money, was that it got a lease of a new building, for the next few years. Therefore, the expenditure was considered as revenue expenditure especially since the assessee did not acquire any asset, but merely acquired the benefit of using modern premises for carrying out its business more successfully or more profitably. The same set of facts exist in the present case, and thus, it is submitted that the judgement of the Supreme Court in Madras Auto Service should be respectfully followed. A copy thereof is hereto annexed as Annexure G for Your Honour's perusal. k) As is the Appellant's case before Your Honour, the Appellant is merely a lessee and not the owner/lessor of the premise that it has taken on a leasehold basis. In this regard, in addition to the above decision of the Apex Court, othe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7; 9,49,721/- claimed on account of repair and maintenance by treating the same as capital expenditure. The Assessing Officer has discussed this at para 4 of his order. He observed that major expenditure on renovation of shop/bakery at Bandra amounting to ₹ 92,66,827/- appeared to be capital in nature. The appellant was asked to give details and explanation to justify the same as revenue expenditure. The authorised representative filed letter dated 30/03/2015 explaining that the expenditure was revenue in nature and was done to increase production for the new outlet and for fixing certain plant and machinery on the newly released premises at Jalal Bakery, Bandra. Out of the repair and maintenance expenditure, the expenditure relating to Jalal Bakery amounting to ₹ 77,17,043/- was treated as capital expenditure and after allowing depreciation @ 5% balance amount of ₹ 73,31,191/-was disallowed. 5.2.2 Further, the Assessing Officer observed that amount of ₹ 10,26,725/-shown under repair and maintenance in ledger account was mainly for setting up kitchen equipments/renovation of kitchen at Jalal Bakery. This amount was also treated as capital in nature and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onstruction shall continue to be the property of the lessor and the assessee as the lessee would only have a right to be a tenant for a period of thirty nine years subject to the payment of rent and the observance of other conditions. The Supreme Court noted that the advantage which the assessee obtained by constructing a building which belonged to someone else was the benefit of a long lease on a concessional rate at a lower rent. The saving in expenditure was the saving in revenue expenditure in the form of rent. In defining as to whether the character of the expenditure is of a revenue or capital nature the Supreme Court emphasised (following its earlier decision in Assam Bengal Cement Co. Ltd, v. CIT[1955]27 ITR 34 that expenditure may be treated as properly attributable to capital when it is made not only once for all, but with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade. If a lump sum payment gets rid of an annual business expense chargeable against revenue, the lump sum payment should be regarded as a business expense. Contrariwise if the lump sum payment brings in a capital asset, then that puts the business on another foot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the reconstruction of the building has obtained an enduring advantage but nonetheless of a commercial nature of securing an equivalent area on the same rent of ₹ 11,300/~ in the new structure. The ownership of the new structure has not been transferred to the assessee nor has the assessee acquired any capital asset. The case, therefore, cannot be distinguished from the situation which arose before the Supreme Court for its decision in Madras Auto Service (P.) Ltd. (supra) on any principled basis. 9. The judgment of the Supreme Court in Madras Auto Service (P.) Ltd. (supra) has been followed by a Division Bench of this Court in CIT v. Hede Consultancy (P.) Ltd. [20021 258 ITR 380/(2003) 127 Taxman 597. 10. At this stage, it would be necessary to note that the decision of the Supreme Court in Madras Auto Service (P.) Ltd. (supra) arose in relation to Assessment Year 1968-69 which was prior to the insertion of Explanation 1 to Section 32 of the Income Tax Act 1961. Explanation 1 has been inserted by the Taxation Laws (Amendment and Miscellaneous Provisions) Act 1986 with effect from 1 April 1988. Explanation I stipulates that where the business or profession of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt area of premises on the same rent as before. Since there was no acquisition of a capital asset and the occupation of the assessee continued in the character of a tenancy, the expenditure could not be regarded as being of a capital nature. 5.2.6 It is noted from a perusal of copies of invoices/extracts of ledger account that practically every bill or invoice by different vendors clearly mentioned repair/maintenance/replacing etc.. These relate to heads such as plumbing, drainage, fixing tiles, labour charges, repair and painting, pest control, plaster repair etc. These clearly indicate preparation of the premises for starting a modern and well equipped bakery. Such repair/ renovation/maintenance jobs are in nature of expenditure incurred on furtherance of the appellant's business of bakery and for obtaining commercial advantage of a modern and well equipped bakery that would cater to the rising demand of the appellant's products. In fact, without incurring these expenses, the full operation of its business would not be able to take off. The building premises do not belong to the appellant and the improvements made are for meeting the higher standards of hygie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hich major/extensive repairs and renovations were done to set up a new bakery and hence these are capital expenditure on which depreciation u/s 32(1) is allowable. The learned DR would place reliance on Explanation 1 to Section 32(1) of the 1961 Act. The learned DR submitted that the assessee has taken new premises on lease hold basis for a period of five years on a monthly rental of ₹ 1 lac for setting up of a new bakery named Jalal Bakery at Bandra and extensive repairs and renovation work were carried out by the assessee to setup a new bakery and hence these are capital expenditure and cannot be allowed as revenue expenditure. It was submitted that since principle of natural justice was breached and the AO did not get an opportunity to verify these additional evidences which were submitted for the first time before learned CIT(A) as no remand report was called by learned CIT(A), the matter should be remanded back to Ld. CIT(A) for fresh adjudication after complying with mandate of Rule 46A of the 1962 Rules. 6.2 The Ld. counsel for the assessee on the other hand submitted that the only issue in this appeal is whether the expenses incurred by the assessee on repairs a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ents installed at its bakery at Bandra and claimed depreciation on the same. The assessee has claimed expenses which were incurred for making cabins, wall partitions, fixing tiles , labour charges, plumbing , drainage, civil work and other repairs and renovation expenses to make the Jalal Bakery operational as modern and well equipped bakery to be revenue expenditure while the Revenue on the other hand is contending the same to be capital in nature. The AO had held the said expenditure to be capital in nature as the bakery was a new bakery at Bandra being set up by the assessee for the first time which will give benefit and advantage of enduring nature to the assessee in expanding its business. The AO duly allowed depreciation on these renovation expeniture after treating these expenditure to be capital in nature. The learned CIT(A) however was of the view that these expenditure are of Revenue in nature. Section 37 of the 1961 Act postulate that to claim an expenses to be business expenses, the same need to be incurred wholly and exclusively for the purposes of business of the assessee and the said expenses should not be personal in nature nor it be capital expenditure. Section 37( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... missioner (Appeals)] [or, as the case may be, the Commissioner (Appeals)], any evidence, whether oral or documentary, other than the evidence produced by him during the course of proceedings before the [Assessing Officer], except in the following circumstances, namely :- (a) where the [Assessing Officer] has refused to admit evidence which ought to have been admitted ; or (b) where the appellant was prevented by sufficient cause from producing the evidence which he was called upon to produce by the [Assessing Officer] ; or (c) where the appellant was prevented by sufficient cause from producing before the [Assessing Officer] any evidence which is relevant to any ground of appeal ; or (d) where the [Assessing Officer] has made the order appealed against without giving sufficient opportunity to the appellant to adduce evidence relevant to any ground of appeal. (2) No evidence shall be admitted under sub-rule (1) unless the [Deputy Commissioner (Appeals)] [or, as the case may be, the Commissioner (Appeals)] records in writing the reasons for its admission. (3) The [Deputy Commissioner (Appeals)] [or, as the case may be, the Commissioner (Appeals)] shall n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the 1962 Rules. It is not the case of the assessee that learned CIT(A) directed assessee to produce these additional evidences as is contemplated vide sub-rule 4 of Rule 46A of the 1962 Rules. Neither it is a case of the assessee where learned CIT(A) has suo moto directed inquiry as is contemplated u/s 250(4) of the 1961 Act. The instant case before us is not covered by these exceptions. The assessee came forward with these additional evidences of its own for the first time before learned CIT(A) and these evidences were not furnished by the assessee under directions of learned CIT(A). The judgment relied upon by the assessee in the case of Manish Buildwell Private Limited(supra) in-fact support the case of Revenue. There is no dispute as to proposition canvassed by the assessee that powers of learned CIT(A) are co-terminus with the powers of the AO but Rule 46A of the 1962 Rules cannot be simply given go bye other wise it will become otiose . This is never the intention of law makers. We are afraid that decision of Hon ble Supreme Court in the case of Kanpur Coal Syndicate (supra) cannot come to rescue of the assessee as there is no dispute to the proposition that learned CIT( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ears on a monthly lease rent of ₹ 1,00,000/-. The said bakery was extensively renovated to make it operational as modern and well equipped bakery to cater to increased demand at its seven outlets. The Plant and Machinery including kitchen equipments installed at this bakery is claimed to be capitalised and there is no dispute as to it. The dispute is with respect to extensive renovation being done in this bakery to make it operational as modern and well equipped bakery. The expenses were incurred towards wall ceiling, fixing tiles, cabins, labour , civil work, plumbing, drainage and other expenses to renovate the bakery to make it operational as modern and well equipped.This bakery is set up for the first time after taking on lease by the assessee. The assessee has claimed that the assessee is not the owner of the premises which is owned by lessor and it has taken the same on lease hold basis for a period of five years on a monthly rental of ₹ 1,00,000/- and claim is made that since the assessee is not owning the premises but the premises is taken on leasehold basis, these renovation expenses are to be held to be revenue in nature . We are afraid explanation 1 to Sectio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have rendered a finding of fact that the so called repairs and maintenance were in fact extensive renovation involving civil work. This expense resulted in an advantage/benefit of a enduring nature in as much as it inter alia resulted in the appellant being able to accommodate more number of employees and facilitate improving its trading operations. Thus the benefit obtained by the appellant, according to the Authorities was substantially in the capital field and could not be entirely allowed as revenue expenditure. The submission on behalf of the appellant, before us, that as the appellant does not own the premises the expenditure incurred on renovation goes to the benefit of the owner of the said premises, therefore in the hands of the tenant it can only be revenue expenditure is more then met by the impugned order of the Tribunal. This in view of the fact that the impugned order places reliance upon Explanation-I to Section 32 of the Act, which allows depreciation to a tenant in case of any capital expenditure incurred for renovation/improvement to the building in the hands of the tenant by deeming the tenant to be the owner of the premises. In this case the benefit of depreci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the benefit of lower rent in view of the expenditure incurred on renovation. It was in that context that this Court upheld the view of the Tribunal that the expenditure for repairs and renovation was in the revenue field. As pointed out above, in the present case, there is nothing on record to indicate that any benefit was obtained by the assessee in the revenue field for having expended the amount of ₹ 31.32 lakhs for repairs/renovation of the office premises. Thus, the aforesaid decisions would have no application to the facts of the present case. 8. It was next contended there is no basis indicated by the Authorities under the Act for apportioning the expenditure in the ratio of 75% and 25% between capital and revenue account by the Revenue. We find that the authorities on facts found that some of the expenditure incurred out of ₹ 31.32 lakhs was incurred for maintenance such as plastering etc. This allowing of 25% was on the basis of an estimate. Nothing has been shown to us that the estimation by the authorities on the basis of facts found was in any way arbitrary or perverse. Thus we find no merit in the above submission. 9. In the view taken by us tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e in the case of Hede Consultancy Private Limited (supra) and Talathi and Panthaky Associated Private Limited(supra) and distinguished the same. The Hon ble Bombay High Court in aforesaid case of RPG Enterprises Limited(supra) dealt with Explanation 1 to Section 32(1) and also explanation to Section 30 of the 1961 Act, which are relevant. This facts and circumstances of the instant case before us are similar to the facts and circumstances of the case before Hon ble Bombay High Court in the case of RPG Enterprises Limited(supra)The explanation 1 to Section 32(1) was reproduced by us earlier in this order. The explanation to Section 30 of the 1961 Act is reproduced hereunder: [Explanation.-For the removal of doubts, it is hereby declared that the amount paid on account of the cost of repairs referred to in sub-clause (i), and the amount paid on account of current repairs referred to in sub-clause (ii), of clause (a), shall not include any expenditure in the nature of capital expenditure.] Thus, keeping in view the entire factual matrix of the case as elaborated by us in preceding para s of this order , end of justice will be met in this case if the issues in these appeals ..... X X X X Extracts X X X X X X X X Extracts X X X X
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